What China’s new red dawn means for Hong Kong
China has once again moved to tighten its control over the former British territory and global financial centre. What will remain of the old Hong Kong’s attractions?
What’s happened?
Last month China’s ultimate decision-making body, the Standing Committee of its rubber-stamp Parliament, passed sweeping reforms that further strengthen Beijing’s tight political control over Hong Kong. The measures slash the proportion of elected seats in the territory’s legislative assembly from 50% to 22%, and require all would-be MPs – as well as all other public officials – to be vetted for their “patriotism” by a pro-Beijing committee. The move prompted a further wave of arrests and convictions of dozens of pro-democracy politicians and activists. One of seven people convicted last week – over a peaceful demonstration in 2019 – was Martin Lee, the 82-year-old barrister known as the “father of democracy”. Lee once helped draft the Basic Law that underpinned Hong Kong’s relative freedoms after 1997. He now faces up to five years in jail for unlawful assembly.
So it’s now “one country, one system”?
It’s certainly a further decisive step on the road to a Hong Kong that is much more tightly integrated into mainland China – both politically and economically. The convictions of both Lee and media magnate Jimmy Lai are likely to set a precedent for several upcoming trials on similar charges of illegal assembly and protest. The year 2019 saw a wave of street protests and sit-ins in Hong Kong sparked by anger at a new law making its citizens liable to summary extradition to the mainland. Last year, Beijing forcefully signalled its patience was at an end and imposed a wide-ranging new national security law on Hong Kong, aimed at eradicating “splittism, subversion, terrorism, and any behaviour that gravely threatens national security and foreign interference”. In effect, it’s an anti-sedition law that gives Beijing very broad, greater powers to stifle dissent, and it’s the first time that a mainland criminal law has been introduced into Hong Kong’s semi-autonomous legal code.
What about economic freedoms?
The Hong Kong government has long taken pride in the perception of its economy as one of the most liberal and open in the world – an international business hub with low tax rates and open ports. For 25 years it topped an “Index of Economic Freedom” published by the Heritage Foundation, a conservative US think tank, though last year it slipped to second place after Singapore. A few weeks ago, however, the Foundation took Hong Kong (and Macau) off its list completely. The move amplified the sense that the territory’s status as a global financial hub is now in real peril.How important is Hong Kong?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Hong Kong is crucially important to global markets as a key Asian financial hub and a unique conduit between China and the West. Last year the Hong Kong Stock Exchange ranked as the world’s second largest initial public offering market, raising a total of HK$389.9bn (£36bn) from 140 listings, according to KPMG, and beaten only by New York’s Nasdaq. In 2019 around US$10trn of US dollar transactions flowed through its bank-to-bank payments system. Some 420 hedge funds (80 more than Singapore) are based there, managing more assets than Singapore and Japan combined. It’s home to the global or regional HQs of 1,500 international firms. And, crucially, it is by far the pre-eminent dollar-funding centre in Asia.
Is it fading as a financial hub?
There’s no sign of that yet, and a surge of global capital seeking to reach Chinese markets has drawn even more investment to Hong Kong over the past year. In a long-established annual survey of global financial centres, updated last month, Hong Kong actually climbed a place from fifth to fourth, behind New York, London and Shanghai. Singapore came in fifth and Beijing sixth, while Tokyo dropped three places from fourth to seventh. The Global Financial Centres Index (GFCI) report cited the popularity of Hong Kong’s stockmarket for new listings, as well as the many cross-border trading schemes with the mainland, as key reasons for the territory’s ranking.
So nothing to worry about?
So long as Hong Kong retains a stable business environment, the free flow of capital, low tax rates and a reliable legal system based on English common law, it’s likely to keep its status as a global financial centre. But if the US were to target the dollar-payment system, or China’s communist party to destroy the independence of Hong Kong’s courts, judiciary and financial regulators, Hong Kong’s allure could fade fast. Moreover, Hong Kong is gradually becoming a centre of Chinese finance, rather than a global one. The share of mainland firms listed on its stockmarkets has risen fast, now accounting for 75% of overall market capitalisation. Last year more than 2,000 mainland mutual funds invested in Hong Kong, a jump of 268% in a year. And Chinese investors brought in net inflows of HK$672bn (£63bn) through an investment channel called “stock connect”, 170% up on the year before.
Will anything change?
Beijing is clearly betting that Hong Kong’s role as an Asian financial centre will mean it remains attractive to Western financial institutions, whatever their governments have to say. Any change is likely to be gradual and its importance as a gateway into China will remain, barring some big upset. Justin Tang, head of Asian research at United First Partners, says most banks with a presence in Hong Kong will also have a base in Singapore, but doubts that a sudden exodus is imminent. “Unless we see something really drastic in China, Hong Kong, the likes of what we are… seeing now on the streets of Myanmar, it’s going to be a slow burn if it’s going to happen,” he told The Daily Telegraph. Beijing is determined to rebuild Hong Kong, says The Economist, “The old Hong Kong is gone. Judge Xi’s China by what it builds in its place”.
SEE ALSO:
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.
Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.
-
Christmas at Chatsworth: review of The Cavendish Hotel at Baslow
MoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
By Dr Matthew Partridge Published
-
Tycoon Truong My Lan on death row over world’s biggest bank fraud
Property tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
By Jane Lewis Published
-
Vietnamese tycoon Truong My Lan on death row over the world’s biggest bank fraud
Property tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
By Jane Lewis Published
-
Japan’s medium-sized stocks provide shelter from trade wars
Nicholas Price, portfolio manager of Fidelity Japan Trust, tells us where to invest in Japan
By Nicholas Price Published
-
What South Korea's martial law turmoil means for the economy
A shock declaration of martial law in South Korea was swiftly put down, but it exposed the nation's vulnerable democracy. What happens now?
By Emily Hohler Published
-
India's stock market drops - why it's thrown investors into frenzy
Nifty 50, India's stock market index, has dropped 8% from a September record amid concerns of an economic slowdown and foreign investors pulling out
By Alex Rankine Published
-
Is India still a good investment?
India's long-term story is compelling, but after a spectacular bull run, warning signs are starting to show. Is investing worth the risk?
By Cris Sholto Heaton Published
-
Rouble hits two-year low against the dollar – what does it mean for Russia's economy?
New US sanctions have plunged the rouble to its lowest level since 2022. Why are investors spooked and how will this affect Putin's economy?
By Alex Rankine Published
-
Has Javier Milei succeeded in transforming Argentina's economy?
Javier Milei won an election last year on an “anarcho-capitalist” platform, promising to take a chainsaw to the overbearing and bloated state. How’s it going?
By Simon Wilson Published
-
Brazil booms – but why do investors remain wary?
Brazil is booming, but you wouldn’t think so from looking at the stock market. What's behind the market paranoia?
By Alex Rankine Published